The Economic Survey cautioned the government on Tuesday against an expensive compromise of fiscal rectitude in trying to make auto and cooking fuels affordable to consumers, while paying a remunerative price to oil refiners.

Government will issue oil bonds worth Rs 28,300 crore (Rs 283 billion) to oil companies in 2006-07 fiscal so that they keep retail prices of petrol, diesel, cooking gas and kerosene lower than their production cost. In 2005-06, oil bonds worth Rs 11,500 crore (Rs 115 billion) were issued.

Drawing parallel with farm sector, where there could be a potential contradiction between a 'remunerative' price for the farmer and a 'fair' price for the consumer in the short run, the Survey tabled in Parliament said: "The same contradiction arises in the case of pricing of petroleum products.

Under-realisation on sale of PDS kerosene and domestic LPG in April-September 2006 was Rs 14,875 crore while that on petrol and diesel was Rs 18,310 crore (Rs 183.1 billion). For the full fiscal 2005-06, under-realisation on kerosene and LPG was Rs 24,630 crore (Rs 246.3 billion) and Rs 15,370 crore (Rs 153.7 billion) on petrol and diesel.

These under-realisation are partly met through issue of oil bonds and upstream companies like ONGC chipping in.

"The reconciliation of such contradiction ought not to be in terms of an expensive compromise of fiscal rectitude," it said.

The Survey said global prices of crude oil and petroleum products reached new highs in the past two years, compelling commensurate increase in domestic prices.

While domestic fuel prices were not raised in line with the surge in global prices, the difference between the cost of production and sale price realised was met through bonds and upstream contribution.

The Indian basket of crude oil prices touched an all-time high of $75.20 dollars per barrel on August 8, 2006, the Survey said.

"The government tried to distribute the heavy burden of this oil price hike equitably among the various stakeholders, namely upstream companies, oil-marketing companies, government and consumers."

While government reduced duties and decided to issue oil bonds, petrol and diesel prices were raised by Rs 4 a litre and Rs 2 per litre, respectively with effect from June 6, 2006. However, the prices of PDS kerosene and domestic LPG were unchanged.

However, in view of declining international prices, the government twice reduced the prices of petrol and diesel -- once in November and the second time this month.

"International prices of oil are projected to remain high in winter, with OPEC announcing a cut in output by 1.2 million barrels per day with effect from November 1, 2006 and a further cut by 0.50 million barrel per day with effect from February 1, 2007 with a view to maintain oil prices," the Survey said.

The pre-Budget document said India's crude oil production in April-December 2006 at 25.40 million tons was 6.03 per cent more than last year. Natural gas production up to December 2006 at 23.53 billion cubic meters, however, was  down 2.42 per cent from 24.10 bcm.

With 19 refineries -- 17 in the public sector and two in the private -- the domestic refining capacity in December 2006 was 148.97 million tons per year, up from 130.11 million tons the previous year.

Economic Survey 2006-07: Complete Coverage